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Macro and Micro Dividends of CPEC: Efforts of Regional and International Players to Disrupt the

Development in the Region, its Ramifications and Rectifications

MARYAM NAZIR NOVEMBER 1, 2016 IPRI REVIEW ADD REPLY

Introduction:

The relationship between China and Pakistan can be best described as promising, flourishing and turning
out to be a success story by meeting all the requirements of changing situations. Over the years, this
unique friendship has transformed into a strong strategic partnership aspiring to have robust economic
cooperation and increasing people to people contacts.

Commercial and Trade Links between China and Pakistan: China has gradually emerged as one of
Pakistan’s major trading partners both in terms of exports and imports. The trade and commercial links
between the two countries were established in January 1963 when both countries signed the first
bilateral long-term trade agreement. Under the FREE TRADE Agreement (FTA) between the two
countries which was signed on November 24, 2006 and implemented from July 1, 2007, Pakistan
secured market access for several products of immediate export interest. Later, both countries signed
the FTA on Trade in Services on February 21, 2009 that became operational from October 10 the same
year.[1]

Pakistan has remained second largest trading partner of China in South Asia.[2] “Since China and
Pakistan signed FREE TRADE Agreement in 2007, bilateral trade volume has increased rapidly. China has
become the largest trading partner to Pakistan during fiscal year 2014-2015. Bilateral trade volume has
amounted upto 17 billion US dollars during the period from January to November 2015, which shows an
increase of 19% as compared to the same period of last year,” remarked Mr. Sun Weidong, Chinese
Ambassador to Pakistan, at the Opening Ceremony of Pakistan-China Business Friendship Conference.[3]

Brief Background of CPEC: The signing of US$ 46 billion worth of CPEC related agreements between
Pakistan and China on the occasion of the visit of Chinese President Xi Jinping to Islamabad on April 20-
21, 2015 is considered as a milestone in strengthening Sino-Pak relations. The vision of establishing CPEC
was floated during President Musharraf’s time, which was later taken further by the former President
Zardari. The project received a boost when in February 2013; President Zardari handed over the contract
of operation of Gwadar port to China by cancelling the agreement with the Port of Singapore Authority.
Gwadar port, that is the terminus of CPEC is strategically located in Arabian Sea and occupies a key
position between South Asia, Central Asia, and the Middle East and lies close to the Strait of Hormuz –
which is known as a gateway for supply of around twenty percent of the world’s oil. The present
government has taken on a speedy approach regarding this project. In May 2013, during the visit of
Chinese Premier Li Keqiang to Pakistan; the construction of CPEC was emphasized. In August 2013, with
the formal announcement of the project, CPEC Secretariat was inaugurated in Islamabad for the
promotion of connections, thus putting the vision into reality. Several high-level visits between Pakistan
and China during the past years further shaped the whole idea of the corridor. In February 2014,
President of Pakistan Mamnoon Hussain, visited China and discussed plans for the economic corridor in
Pakistan with the Chinese counterpart.[4]

CPEC Project: China‘s OBOR called, One Belt and One Road project is expected to open up new vistas of
opportunity for trade, infrastructure, investment, capital and people. This project will serve as a bridge
and help Pakistan and China in the development of closer relations with countries in southern, central
and western Asia for inter-regional economic integration. With a planned portfolio of projects totaling
around $46 billion, the size of the ‘investment’ in the CPEC over the next 15 years, if materialized, will be
equal to the cumulative gross foreign direct investment inflows into Pakistan since 1970.[5]

The motivations behind China’s promised investment in Pakistan are primarily to assist South Asian
countries especially Pakistan in the economic development and connecting various regions and
countries through CPEC for trade and connectivity within the neighboring regions and the outer world.

CPEC has two main components, first one plans to develop a new trade and transport route from
Kashgar in China to the Gwadar Port and the other component envisages developing special economic
and industrial zones along the routes which includes power projects as well.

Out of total investment of $45.69bn, $33.79bn are allocated for energy projects, $5.9bn for roads,
$3.69bn for railway network, $1.6bn for Lahore Mass Transit, $66m for Gwadar Port and a fibre optic
project worth $44mn. A sector-wise breakdown of China‘s investment shows that energy production
tops the list of sectors for both investment and construction followed by communication infrastructure
sector including construction of roads, rail lines and port terminals.

Macro and Micro Dividends of CPEC: Macroeconomics is associated with the conditions of national
economies; it deals with statistics such as unemployment rates, gross domestic product (GDP), overall
price levels, and inflation however, microeconomics deals with single factors and the effects of
individual decisions.

CPEC being a complete package of rail/road networks, infrastructure and energy projects promises
economic growth. Industrial and special economic zones (SEZs) are considered to be economic backbone
within the structure of CPEC. At the moment, Pakistan needs a more developed industry to lay solid
ground for its economic takeoff. The establishment of dedicated industrial zones along the routes of
CPEC will provide a golden opportunity to enable Pakistan accelerate the process of high level
industrialization.
Under the CPEC plan, Pakistan will be fully loaded with industrial parks and processing zones. The
backward and remote areas of Pakistan will receive a large chunk of these zones in the second phase.

The CPEC has direct bearings on the economy of Pakistan and China. Pakistan’s exports in the current
fiscal year are around US$ 17 billion. The CPEC will give an unprecedented boost to the bilateral trade
between Pakistan and China as industrial and agricultural production would be generated in 29
industrial parks and 21 processing zones all over the country during the first phase of the projects.[6]

These Industrial zones can be manufacturing hubs producing a large amount of goods that directly cater
to the ever accelerating urbanization process and rapid burgeoning of middle class. Having local
production replace the imports can help bring down price and increase affordability in areas where tariff
or transport cost is high. Injection of more advanced technology will also help improve quality and
reduce environmental impact in areas where Pakistan already has a reasonably developed capacity.[7]

Also, these industrial zones will enable Pakistan to produce more internationally competitive products,
both to improve its engineering image, and to tilt the trade balance more in its favor. By making
industrial zones production the center of high quality manufactured goods, Pakistan will be more
favorably positioned in the international TRADE MARKET. A larger percentage of manufactured goods in
export portfolio will not only make it more resilient to changes in market demand and price fluctuation,
but will also bring more profit due to a bigger added value. A shining example of China-Pakistan
cooperation further bearing fruit is the successful sale of JF-17 fighter jets to Myanmar, and there are all
the reasons to believe that this success story can be replicated in the non-military sectors as well, with
the help of industrial zones.[8]

Manufacturing sector, with its multiplier effect down the pipeline of value addition, is the key
contributor to employment opportunities, export volumes, and development of country. For a country
of the size of Pakistan, without a solid industrial base, however rapidly its GDP is growing, it will be
doing only high-speed taxing rather than a real take-off, with the economic dividends from non-
industrial sectors not strong and sustainable enough to support a shift in a country’s economic
landscape.[9]

It is estimated that Chinese investments can lift GDP growth beyond 6% through direct impact for the
financial years of 2016-18. The local component of this investment is expected to be around US $ 18
billion, assuming a higher local component for investments in Hydel, Road, Rail and Gwadar Port (50% to
80%) and lower for Machinery intensive coal based power plants (20%). This alone could add 2.1 percent
to GDP growth each year during the financial year 2016-2018 and raise GDP growth above 6%.[10]
In 2016, the industrial sector has already recorded a remarkable growth of 6.8 percent against the target
of 6.4 percent and it is all time high in last eight years.[11] According to the Pakistan Economic Survey
2014-15 industrial sector registered only a 3.62 percent increase, not only far below the development
targets set at 6.8 percent, but also lower than last year’s 4.45 percent growth.[12]

As Pakistan is facing a severe energy crisis along with a critical infrastructure deficit, these investments
will also help Pakistan in solving the power shortages that have crippled its economy, thus serving
mutual needs of both the countries.

Over $34 billion worth of energy infrastructure are to be constructed to help alleviate Pakistan’s chronic
energy shortages, which regularly amounts upto 4,500 MW, and have shed an estimated 2-2.5% off
Pakistan’s annual GDP. Over 10,400MW of energy generating capacity is to be developed between 2018
and 2020 as part of the corridor’s fast-track “Early Harvest” projects in conjunction with four projects
under construction prior to the announcement of CPEC. Electricity from these projects will primarily be
generated by coal, wind and solar sources.

Once fully developed, Gwadar port and allied facilities can provide Pakistan with estimated annual
revenue of US $40 billion, besides generating two million jobs. The corridor through Gwadar will give
China shortest access to the Middle East and Africa, where thousands of Chinese firms, employing tens
of thousands of Chinese workers, are involved in development work. The corridor also promises to open
up remote, landlocked Xinjiang region and create incentives for both state and private enterprises to
expand economic activity and create jobs in this underdeveloped region.[13]

Impediments and Internal Challenges:

Pakistan hopes for speedy implementation of CPEC and its projects but there are various impeding
factors, challenging the CPEC development.

It is believed that certain aspects of primary importance have not been cleared by the authorities
dealing with CPEC and developmental projects falling under its framework. The routes of highways,
railways, sites of industrial zones, energy projects and nodal cities have been decided but the
calculations of local component, its benefits and how this investment will bring improvement to an
individual’s life have not been made public for the understanding of masses.

Currently, Pakistan is facing a significant trade deficit. With a slight reduction in both export and import
volume from the previous financial year, Pakistan’s trade deficit has worsened in the last few years. A
brief review of the major exported items makes it clear that at the root of this export weakness is
Pakistan’s lack of international competitiveness in manufactured goods and near dominance of raw
materials or semi-processed goods as export items. Lack of competitive manufactured goods has left
Pakistan with no other choice but to import more than it can export, which hampers its ability to fully
enjoy the economic vitality from regional economic integration. And this has been a key reason behind
dropping export volume of Pakistan over the last few years, despite industrial growth.

Pakistan’s economy is considered among emerging economies of Asia in future. Along with a feasible
plan for economic uplift, it is necessary to curb the menace of corruption, nepotism and inefficiency at
national level.

Role of Regional and International Players to disrupt the development:

The economic aspects of CPEC can transform the fate of the regional states in a positive way. With
greater economic value, CPEC provides an opportunity to all regional states to make South Asia a
seamless integrated region. However, the divergent and conflicting interests of some regional and extra-
regional states are a threat to the construction of CPEC.

India:

India has made false claims regarding CPEC, associating territorial disputes and concerns of regional
security and stability with it. Modi’s government has termed CPEC and related developments as
unacceptable. India calls the economic venture of CPEC as a balancing strategic move to counter the
Indo-US strategic engagements. Gawadar Port is wrongly perceived in India as less likely to become a
vibrant economic hub than to serve as a naval base for China’s expanded blue water fleet and
operations throughout the Indian Ocean.[14]

Besides, India is sponsoring terrorist activities in Pakistan to destabilize Balochistan with the false hope
that terrorist acts will impede the construction of CPEC. These speculations have turned into a clear
reality after the arrest of Kulbhushan Yadav, an Indian spy in Pakistan who has confessed that India has
been destabilizing Balochistan and KPK. On numerous occasions, Pakistani civil-military leadership has
hinted about possible RAW-NDS nexus behind terrorist attacks in Balochistan, the recent Quetta carnage
is considered to be a case in point. According to media reports, a special desk has been created in RAW
to undermine and thwart the implementation of CPEC. The intelligence agencies of Pakistan have
gathered authentic information to this effect. The RAW chief who reports directly to the Indian Prime
Minister is personally supervising the venture. For India, CPEC means that China shall have the upper
hand in the Arabian Sea which has prompted India to expedite work on the Iranian port of
Chabahar.[15]

Afghanistan:
CPEC is geo-strategically important for a landlocked state like Afghanistan. With the extension of CPEC
to Afghanistan, the country can become a major beneficiary of this project as in future the corridor will
contribute to the economic development of this country by enhancing economic activities in the area,
which can bring the fragile economy of Afghanistan back to normalcy.

In order to linkup Afghanistan with CPEC, Pakistan has pledged the construction of 256 km Peshawar-
Kabul motorway which will give Afghanistan an opportunity to start economic and commercial activities
through Indian Ocean. As per the plans, the western alignment of the corridor, which originates from
Gwadar and runs through Khuzdar, Zhob and finally reaches Islamabad via D.I. Khan, will have an
additional connectivity to link Afghanistan through Chaman.[16]

However, the suspected RAW-NDS nexus, the use of Afghan soil against Pakistan and internal instability
of Afghanistan are some of the factors raising apprehensions in Pakistan. Pakistan wants peaceful and
economically progressive Afghanistan in its neighborhood but if it remains destabilized, the above
mentioned factors could prove to be detrimental to the regional economic integration. Afghanistan
should understand the economic advantages of CPEC and ensure that its soil is not used for disruptive
activities against Pakistan.

Iran:

CPEC initially faced resistance from Iran which perceived the development of Gawadar port as a
competing project to Chabahar port and accepted the Indian proposal to develop it. If examined
carefully, there are massive opportunities of cooperation for Iran in the corridor project. That is why, in
September 2015, Iran had hinted about the consideration of options to participate in CPEC. Iranian
participation will help both countries improve connectivity through road and railway networks to
expand the scope of trade and transportation.

Similarly, Pakistan and Iran should outline the strategy to operationalize the proposed sister-port status
of Gawadar and Chabahar in order to enhance connectivity. The proposed Chabahar-Gwadar MoU
which includes cooperation on border trade, ferry services, shipping lanes and initiation of Iran-Gawadar
flights may be executed. Pakistan and Iran should work on the execution of proposed energy and
infrastructure ventures such as the IP pipeline and Iran-Pakistan 1000 MW electricity project in order to
meet the energy requirements of Pakistan.

Gawadar vs. Chabahar Port:


With huge scope of cooperation, the only worrisome element in Pakistan-Iran relations is the Indian
strategic moves towards Iran. India has announced an investment of US $500m to develop the Chabahar
port in Iran through series of projects which both countries are considering worth hundreds of millions
of dollars.[17] Such investment in the development of Chabahar port will allow India to circumvent
Pakistan and open up a route to landlocked Afghanistan with which it has developed close security ties
and economic interests. Indian presence in Chabahar will also counterbalance Chinese presence in
Gwadar, and it will also get access to landlocked CARs through this port. It can be said that the
developments at Chabahar port reflect Modi‘s keen interest in forging robust trade links with Central
Asia, including the landlocked Afghanistan.[18] New Delhi has already spent US$ 100 million on building
a 220-kilometre road in the Nimroz province of Afghanistan. The road will be extended to Chabahar as
per the plans. Modi‘s sense of urgency in concluding trade pacts with Iran is apparently driven by the
CPEC.[19]

United States:

Unlike common perceptions, United States has not opposed the corridor project. It is said that if
successful, the CPEC could provide important benefits to Pakistan’s economy. Economic growth is vital
to political stability, and therefore the project should be considered a welcome development and
encouraged by the United States.[20] However, the US cannot remain totally unconcerned with the
perceived strategic implications of CPEC.

Under the proposed plan of CPEC, establishment of Gawadar port as an international economic hub may
face opposition from US due to increased Chinese influence in the region and its strategic access to
Arabian Sea. It is believed that US may be working on strategies to cope with the expansion of China in
the region; for example, it has also given its own version of the New Silk Road Project seeking to enlarge
its control in rapidly growing Central and East Asian regions.[21] The United States also has its own long-
term concerns associated with CPEC, as it represents the leading edge of China’s expanding access to,
and likely influence within, Eurasia.[22] Instead of transforming this competition into rivalry, US should
consider accepting the positive role of China as the new economic power.

Pakistan’s Role:

Pakistan should explore and capitalize on all opportunities for an economic revival. Pakistan should
make efforts to decrease tension with its Eastern and Western neighbors for the intertwined security
and economic interests. In order to achieve maximum out of CPEC, internal differences should be
resolved with the realization that this project is beneficial for Pakistan. Meanwhile, Pakistan must
consider the growing Chinese role in international economic affairs in a wider regional and global
context. CPEC will strengthen the bilateral relations between China and Pakistan. Pakistan also needs to
focus on its own economy including various industrial and trade sectors so that the corridor will be
utilized in the best possible way.

CPEC has been considered as economic lifeline for Pakistan by the civil-military leadership of Pakistan.
Chinese leadership has been promised the security of their investment and people in Pakistan. CPEC is
destined to bring significant improvement in the lives of hundreds of millions of people, besides further
promoting mutual interdependence among regional states. The security of CPEC is our national
undertaking and we will not leave any stone unturned to ensure its timely completion and
uninterrupted success, said the COAS, Gen. Raheel Sharif.[23]

In order to dispel concerns about the safety of Chinese workers and officials to be involved in CPEC,
Director General Inter-Services Public Relations (ISPR) in a statement issued on April 22, 2015 said, “a
special force of 12, 000 personnel is being raised for Pakistan-China economic projects. The new force
named “Special Security Division” would be of the size of a division consisting of nine army battalions
and six wings of para-military force like Rangers and Frontier Corps.” Hence, the government of Pakistan
is mindful of security threats which may arise once the CPEC project takes off.[24]

Conclusion:

CPEC will certainly help Pakistan in achieving an economic turnaround but for that Pakistan has to work
hard to complete the CPEC projects in time by ensuring its security. It is only through national consensus
and collective efforts that Pakistan can make CPEC a reality by resisting external power’s efforts of
disrupting the construction of CPEC.

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